With the air transport industry in transition and profitability improving, it is worth taking a look at the reasons behind this trend. Airlines take two forms: major international carriers, and intra-domestic carriers with reduced-cost structures.
Fleet renewal and reallocation
When Delta Air Lines, Inc. (NYSE:DAL) merged with Northwest in 2008, it embarked upon a period of improved financial results, thanks largely to the combination of the two carriers’ route networks.
By replacing its older aircraft and redeploying its fleet to more profitable destinations, the company attracted more passengers, and improved its operating margins, revenue, and earnings per share.Other metrics, including its load factor (occupancy rates) and operating margins, also improved dramatically.
The airline, which had been operating in the red for much of the previous decade, was now much more profitable.
Delta Air Lines, Inc. (NYSE:DAL) paved the way for other mergers, namely United/Continental and Southwest/AirTran. Given the benefits, airlines are likely to adopt Delta Air Lines, Inc. (NYSE:DAL)’s strategies and become more consistently profitable. For proof, look to US Airways’ pending merger with American Airlines. If it follows Delta Air Lines, Inc. (NYSE:DAL)’s example, American may bounce back from bankruptcy with a more efficient system that will support profitability.
Situated in growing markets
A number of smaller airlines have been performing rather well providing service between leisure destinations solely within the U.S. The first of these, and still a strong entity, was Southwest Airlines Co. (NYSE:LUV).
With the acquisition of AirTran in 2011, it has gained a solid presence in Atlanta, as well as Baltimore, Milwaukee, and a new business-class service. The acquisition expanded its major market presence, allowing Southwest Airlines Co. (NYSE:LUV) to add numerous routes and city pairings.
Thus, as the integration of AirTran is completed, Southwest Airlines Co. (NYSE:LUV) should achieve benefits such as revenue from newly added routes and cost cuts stemming from increased scale. The company’s cost structure is already allowing for profit margins of 2.20% over the trailing 12 months, well above the industry average of 0.02%. .
Southwest Airlines Co. (NYSE:LUV) shares offer capital appreciation potential, based on the company’s merger synergies and other benefits from expansion. The company is probably the only major airline to pay a dividend, with a 1.3% yield.
Capacity increases and growth
Numerous leisure carriers are growing their route networks at significant rates, and simply gaining from the rise in air traffic.